Archive for the ‘ADAGIO GROUP’ Category

Many people are drawn to real estate investing because it allows them to play an active role in determining the success of their investments. For others, real estate investing represents a unique career opportunity to dramatically improve their entire lives. This opportunity lies in real estate’s unique ability to be leveraged… whether through traditional bank mortgages or by more creative means such as lease-options, subject-to purchases and seller carrybacks. More astute real estate investors, or operators, take leverage to the next level with a foray into borrowing from private lenders or even recruiting an equity partner or two. When an operator uses the money of others, via debt or equity, who do not actively participate in his business in exchange for the promise of a return on investment, he has entered the capital markets by issuing securities (and yes, a mortgage loan against an investment property is considered a security). As the name suggests, capital markets are simply the markets for capital, or money; people who hold money, or savers, have to put it somewhere, and just like at your local grocery store, savers look for the highest quality products at the lowest prices. Generally speaking as applied to the capital markets, quality corresponds to risk while price corresponds to returns. Some investors have a higher risk tolerance in exchange for the expectation of higher returns and may not need to cash out, or liquidate, for a fairly long period of time… maybe decades. Others, like retirees, typically have a lower tolerance for risk, as their savings is not easily replaceable, and they need to generate cash, or liquidity, immediately on a monthly or quarterly basis to cover the expenses of their retirement years. Of course, there are any number a variations of risk, return, and liquidity appetites in between, but at the end of the day, these are the only three meaningful considerations in deciding how to invest. Everything else is just a distraction.

From the use of sophisticated sounding jargon to tell fanciful stories about the future, to the veneer of nice suits and high-rise offices, the traditional financial industry specializes in marketing such distractions to capture the over 17 trillion dollars in savings held by U.S. workers. Ultimately, Wall Street operates in the very same way that a casino does: it strategically facilitates the creation of gambling opportunities via securities for customers to wager their money at some well-calculated probability. The biggest difference between a casino and professional finance is that the probabilities associated with investing are much more complex and easier to hide; but like a casino, financial institutions ensure the house always wins by stacking the odds eternally in their favor (it’s also why physicists and mathematicians who are driven by money move to Wall Street). To make the point more obviously, sound investment decisions boil down to nothing more than numbers (assuming you can trust those numbers, which is the purpose of financial audits): expected net return (some percentage), associated risk (also a percentage), and liquidity, or the amount of time your money is locked up (expressed as some unit of time: days, months, years, etc.). So, how are these numbers calculated? That is the 17 trillion dollar question, and the answer to that question is the fundamental tool of the financial wardens… the firms that underwrite and make the market for securities: investment banks.

Investment banks are intermediaries that, amongst many other functions, help typically large companies raise capital by advising on and underwriting new securities issues. To prepare for a new issue of securities, investment banks first advise their clients on considerations such as capital structure (how much debt vs. equity should be issued; what types of equity and debt should be issued, etc.), the strategic use of other financial instruments (such as warrants), and operational considerations as a means to ensure its success. Once offerings are constructed, investment banks underwrite the securities that are being issued. Underwriting means that investment banks price securities offerings, then guarantee their pricing by typically purchasing the offerings before reselling them to the public at a markup. So as you can imagine, investment bankers are very keen on developing a thorough and meaningful understanding of how to price risk, even if they don’t communicate all the nuances to the public through their distribution channels (i.e. financial advisers).

Moving back into the realm of private real estate, the investment banking function is badly needed as real estate operators, regardless of size, typically have no idea how to structure models and price offerings in a manner that can compete with the sophistication of their rivals: private equity and hedge funds. As a result, private real estate operators are dismissed by the financial industry, which impedes their access to the capital markets in a classic example of the Chicken and Egg Problem. The closest thing private real estate operators have to third-party capital raising support is crowdfunding, where financial sales people who charge disproportionately high fees check a few boxes to meet their regulatory obligation before stating that the operators on their platform are legitimate… the investing public then herds into their internet portals in a glorious example of the blind leading the blind. (If you don’t believe me, just ask the broker-dealer representative of a crowdfunding platform what the risk-adjusted returns of a given issue are; these concepts are hardly covered on the FINRA exams as such licenses are designed to simply credential financial pushers.) This ticking time bomb exposes the investing public to unknown risk and perpetuates Wall Street’s debilitating view of real estate as the red-headed step child of asset classes: even the best of operators are simply riding market cycles.

So herein lies the problem and the opportunity… many people sense it, but they can’t put a finger on this key idea: residential income (not market cap rates) experiences less volatility, or random price movement, than any other asset class’s fundamental valuation metric, which means residential real estate securities, when properly structured and managed, offer the potential to generate the best risk-adjusted returns amongst all asset classes regardless of market cycles… from Apple stock and U.S. Treasury bonds to long/short hedge funds. The ability to translate this idea into numbers (i.e. α) is the ability to move real estate from the fringes of the investing world and into mainstream finance. Why should real estate investors care? Because when you, as a private real estate operator, can offer savers verifiably better risk-adjusted returns than the other options they have to choose from (such as stocks, bonds and DIY real estate investing), you can then capture a significant portion of their money for your business: I’m not talking about hundreds of thousands of dollars; I’m talking about hundreds of millions…

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Adagio is a private alternative asset management firm with a focus on residential income real estate. In addition to managing our proprietary funds, we strive to bring the exclusive financial expertise of Wall Street to the real estate investor market. The two most esoteric yet valuable skills of finance are risk management and capital formation: risk management affords investment managers the ability to accurately price assets, while capital formation is literally the process of creating assets. We will implement these skills on your behalf by creating and managing an investment fund (e.g. hedge fund, private equity) dedicated to supplying capital to your business with ongoing support at ultimately no expense to you:

We will develop the best model and capital structure to maximize your risk-adjusted returns while matching your efforts with potential investors’ risk, return & liquidity appetite.

We will have the requisite offering documents drafted (i.e. create actual securities for sale), and create industry standard marketing materials for a fund providing lower-cost capital to your business. This allows you to leverage our capital position, performance history and investment banking relationships.

We will ensure all necessary SEC filings are submitted & compliance issues are addressed, provide ongoing risk management support, and manage all reporting.

Adagio Compensation: $50k deposit for drafting documents (reimbursed to you as an expense to the fund) plus 2&20* on the feeder fund (deducted from investors’ returns). For more complex solutions, Adagio may be retained for consulting services at a rate of $750 per hour.

Sample Fund Summary/Fact Card/Two-Pager

LEGAL DISCLAIMER: This article is not an offer to sell, nor a solicitation of an offer to purchase any securities instrument or any interest in Adagio, LLC or its current or future affiliated entities, nor is this article an offer of investment advice, tax advice or legal advice.

* 2&20 is shorthand for a type of compensation structure that hedge fund managers typically employ; the fee structure is comprised of a 2% management fee, or an annual 2% of the total value of assets under management (“AUM”), in addition to a 20% performance fee, or 20% of annual gains.

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FROM WALL STREET TO MAIN STREET:

BRINGING THE SECRETS OF MONEY CREATION TO YOUR REAL ESTATE MARKET

You are invited to watch a replay of the exclusive online seminar (free admission) that took place Wednesday, June 29th at 9:30pm EDT: From Wall Street to Main Street… Bringing the Secrets of Money Creation to Your Real Estate Market presented by Benjamin D. Summers, Managing Director of Adagio Group.

Ben discusses how the secrets of capital formation, or accumulation of other people’s money, employed by financial institutions can be used by real estate investors and entrepreneurs in their local markets to acquire the capital they need while responsibly serving their investor clients. The topics include risk management (how to calculate risk-adjusted returns, manage tail risk, etc.), financial structures (e.g. capital structure, options, etc.) and private securities offerings (i.e. creating saleable shares) for the purpose of raising unlimited capital on your terms.

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One of most prolific and powerful tools of “creative” finance in real estate is the lease-option, but this tool represents only the proverbial tip of the iceberg when it comes to the most powerful breed of derivatives in the investing world, options. There are two basic types of options: the call option (or “call”) and the put option (or “put”). A call is what is utilized in the traditional lease-option; the put, on the other hand, is virtually unheard of in the world or real estate. An option, call or put, can be used as a standalone contract or in various combinations simultaneously to bet on any potential outcome. In other words, option strategies can be structured to profit from a property rising in value, falling in value, not changing in value, or simply by its value just moving… up or down. While options strategies are considered basic knowledge for financial professionals, they are hardly understood by real estate investors and agents, and herein lies the opportunity. In an effort to help expand their market within the real estate investing community (which will improve its overall liquidity), this article will attempt to briefly explain what options are and impart a basic understanding how they can be utilized:

Derivatives

In simple terms, a derivative is any contract that derives its value from the asset that it’s written on, or underlying asset. Futures/forwards contracts, options and swaps are the most common types of derivatives. One simple example of a derivative is a purchase contract on a house, which would be referred to as a futures or forward contract in the world of finance. If a house has a current market value of $500k and the purchase contract has a sale price of $450k, then the purchase contract has a potential value of $50k. Of course there are many considerations that affect the value of the purchase contract such as the method/accuracy of estimated market value of the underlying house, term (time left to close), and perceived strength of the buyer; but regardless, both in theory and in practice, the assignable real estate purchase contract is a derivative that can be sold (i.e. assigned) in the open market to another party for a fee.

Call Option

A call option is an agreement in which an investor pays someone else, a counterparty, for the right, but not the obligation, to buy something (i.e. underlying asset) at a specified price within a specific time period, or term. This payment is called an option fee, consideration or premium. It may help to remember that a call option gives an investor the right to “call in” (buy) an asset. Investors profit on a call when the underlying asset increases in price. A call option is said to be in the money when the purchase price of the underlying asset, or strike price, is below the market price of the underlying asset (plus the option fee if it is not credited to the strike price); the call is out of the money when its strike price is above the market value (again, plus the option fee if it is not credited to the strike price). In the case of the lease-option (which is two separate agreements: a lease and a call) investors are generally banking on either the underlying property appreciating during the term of the option or they believe they have negotiated a strike price that is below current market value with no expectation of the property falling in value, or depreciating, during the option term. It’s worth noting that the lease is not necessary to benefit from the value of the option.

Put Option

A put option is the opposite of a call where the owner of an underlying asset pays an option fee to a counterparty for the right, but not the obligation, to sell the asset at a specified price within a specified time. A put option is said to be in the money when the strike price is above the market price of the underlying asset (minus the option fee if it is not credited to the strike price), and out of the money when its strike price is below the market price (again, minus the option fee if it is not credited to the strike price). A put becomes valuable as the price of the underlying asset falls, or depreciates, relative to the strike price. For example, if an investor buys a put option on a property for $500k with a term of two years, he has the right to sell is house for $500k at any time during that two-year period to the counterparty of his put. An investor might do this is he thinks the market might crash during the put option term or if he believes he overpaid for the property. Put options can act as a form of insurance against a depreciating asset or crashing market.

Long and Short Option Positions

For each of these two types of options, an investor can take either side of the contract, the long or the short position: In the case of call options, a long position is the right to buy (call) the underlying asset. For the long call holder, the payoff is positive if the asset’s price exceeds the strike price by more than the premium paid for the call. Short call holders believe an asset’s price will decrease; they are said to sell or write a call. If an investor sells a call, holding a short position, he gives up the control to the buyer of the call (the long call) who determines whether the option will be exercised. For the writer of the call, the payoff is equal to the premium received from the buyer of the call if the asset’s price declines, but if the asset rises more than the strike price plus the premium, then the writer will lose money.

Like a short call position, long put holders believe an asset’s price will decrease and buy the right (long) to sell (put) the underlying asset. As the long put holder, the payoff is positive if the asset’s price is below the strike price by more than the premium paid for the put. Short put holders believe the asset’s price will increase and sell or write a put. For the writer of the put, the payoff is equal to the premium received by the buyer of the put if the asset price rises, but if the asset price falls below the strike price minus the premium, then the writer will lose money.

The Straddle and Other Simultaneous Options

While options can be used to generate returns based on an expectation that an asset’s price will move in a particular direction, they can also be used to generate returns based upon an expectation of whether an asset’s price will simply move at all, i.e. experience volatility. A straddle is an investment strategy involving the purchase or sale of a put and call option at the same time on a single asset with the same strike price and term; this allows the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. The purchase of the call-put pair is known as a long straddle and profits are made from significant price movement up or down insofar as the price of the underlying asset increases or decreases more than the amount of the option fees paid. The sale of the put-call pair is known as a short straddle and profits are made from stagnant pricing as the owner of the short straddle collects option fees for both the put and the call when neither will be exercised. It is worth noting that options can be used in many various combinations and to accomplish any number of hedging strategies.

Options and Real Estate

Option strategies represent a relatively inexpensive, low-risk approach to betting on any possible outcome an asset may experience; all that is needed is another party with the conviction to put their money up in support of the opposing view. Real estate brokers are perfectly positioned to match such counterparties and to establish real estate derivatives as a liquid investment market.

The unique advantage of real estate as compared to traditional financial assets is that hardly anyone in the residential market has any idea how to price and value options. It is common practice for real estate owners to charge disproportionately small option fees for the right to buy their property at a given price (especially when a call is paired with a lease), which affords real estate investors the unique opportunity to recognize substantial upside potential while incurring hardly any risk. This disproportionate, or asymmetric, risk-reward profile (i.e. convexity) is the ultimate goal for professional investors.

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Most real estate investors face the nearly impossible task of competing for the few quality deals in their market against tens, if not hundreds, of deep-pocketed, well-connected and established investors already there. To survive, new and undercapitalized investors are forced to work many fruitless hours blindly mailing, calling, driving and knocking on random doors to find whatever scraps may be left over. After all this effort, in the rare instance a good deal is finally secured, investors are typically rewarded by a time clock on escrow that is subject to the whims of an unprofessional “hard money” lender, or a race to close another buyer. On the other hand, those who do have access to funds typically underestimate risk and expenses overpaying for assets and eventually incurring unexpected financial loss. All the while, the few real estate brokers and agents who even attempt to work with investor clients generally serve as little more than conduits to the MLS, limited by their general lack of investing knowledge.

This investing culture is unique to real estate, and it’s not how the professional world of investing works. There’s a better way, and the financial firms of Wall Street, such as hedge funds and investment banks, capitalize on it everyday. As a financial firm who deals in residential real estate as its primary asset class, we at Adagio Group have developed a course to empower emerging real estate investors and their agents to break through the established competition and daunting hurdles. We have distilled the insights of Wall Street into one concise package: the Accredited Investment Professional (“AIP”) course and designation; it includes everything one needs to become a fund manager: no upselling, events, bootcamps or any other shady sales tactics. The AIP course covers risk analysis, deal structuring and investment fund creation; upon successfully completing the course, AIP designees are afforded the financial backing of Adagio Group, which includes a $5MM proof of funds letter. This program takes students from fighting for a few thousand dollars to making potentially millions with their real estate investment business by bringing the exclusive expertise and professionalism of Wall Street to their Main Street.

The AIP course provides an introduction to basic financial and economic principles to serve real estate investors and agents in developing and executing investment strategies that improve risk-adjusted returns and liquidity relative to traditional real estate investment strategies. This course also teaches students how to access the private capital markets raising capital on terms and rates that are commensurate with risk enabling them to establish and manage their own investment fund.

The AIP course is divided into four lessons with a final exam and is offered entirely online via the Blackboard platform; it includes risk calculation and pricing (CAPM, Sharpe Ratio, etc.) spreadsheets and a private fund offering documents template with SEC Form D, in addition to sample financial industry-standard marketing materials ($35,000+ value). Further, the instructor is available for virtual office hours to assist students as needed with course content and materials ($750/hr value). For more information, review the AIP syllabus.

The AIP designation is awarded upon completion of the 150-hour AIP course. AIP designees are granted the opportunity to work directly with Adagio Group in developing their real estate investment business ($750/hr value) and leverage Adagio’s capital position, performance history and investment banking relationships. AIP designees are empowered to beat local competition, no matter how established, with the strength of skills and resources utilized by the real players in the world of investing, Wall Street.

Real estate brokerages and unlicensed legal entities (i.e. LP or LLC) may become accredited by registering for the AIP course and having all of its managing principals (i.e. broker of record, managing partners or members, etc.) pass the final exam; all registered brokerage and entity principals and associates are allowed access to the course. The course registration link and tuition are the same for brokerages and entities as for individuals and includes the final exam for one broker or principal; each additional broker, principal or associate (i.e. real estate agent) must pay one installment to take the exam. The registering entity representative must submit a *.pdf copy of the entity’s Articles of Organization listing each of its principals to solutions@adagiollc.com as a condition of enrollment. All individuals who pass the exam will be awarded the AIP designation independently of their respective brokerage or entity.

To begin the process of becoming an Accredited Investment Professional, register for the AIP course; financing is also available with six pay-as-you go installments.

LEGAL DISCLAIMER: The contents of the AIP course are not to be construed as or used for the purposes of offering investment advice, tax advice, legal advice or brokering securities, nor is the AIP designation to be used as a marketing asset for securities issuers.

The EB-5 Program enables foreign investors to immigrate to the U.S. and receive permanent residency status (a “green card”) by investing $1MM in a commercial enterprise that will employ 10 full-time U.S. workers. The green card obtained by the investor is conditional for two years during which time the investment funds may not be withdrawn and the requisite jobs must be created. As these standards are met at the end of the two-year period, all conditions on the green card are removed.

Adagio manages all facets of the program on behalf of EB-5 applicants putting their investment to work in a new entity utilizing the same model as Adagio’s real estate investment fund. Once we are retained, the process begins with the foreign investor completing a preliminary questionnaire and documenting the “Lawful Source of Funds”. Adagio then drafts the EB-5 compliant business plan, associated entity documents and economic report, which discusses how the business will generate the requisite 10 full-time jobs. Once these documents are completed, the investor wires the investment funds to Adagio and the formal application for the visa or green card is submitted to U.S. Citizenship & Immigration Services; “conditional permanent resident status” is typically issued within six to 10 months. 21 months after approval of the initial application, we file a petition for removal of conditions demonstrating that the investment funds have not been withdrawn and the requisite jobs have been created.

One issue that is significant for investors to consider is proving the “Lawful Source of Funds”. Substantial documentation is required to prove that the investor did not acquire the funds through unlawful means. Documentation utilized to meet this requirement may include tax returns, real estate transactions, securities transactions, inheritance documentation, stock dividends, employment records, bank records, etc. Investors typically consult with their banker at home to advise them on this issue. It is worth noting that we have often experienced bankers providing potential EB-5 program participants misleading advice based upon limited or misguided information.

Many foreign nationals considering immigrating to the U.S. with an EB-5 visa start to inquire about the program with an immigration attorney, which is completely reasonable. With the EB-5 program, however, most immigration law firms charge hundreds of thousands of dollars and provide little value as they typically subcontract the work to a regional center that employs its own immigration attorneys who source the investment project then draft the required documents. While it may be worthwhile to work directly with an immigration attorney (especially if the investor wants to manage his own business), it is generally not the best financial strategy to let him manage the EB-5 process. As a private asset management firm that actively manages EB-5 investments, Adagio removes these unnecessary expenses and inefficiencies by working directly with our local regional center and its immigration attorneys to create all EB-5 compliant documents and generate the best returns possible for our clients.

We are seeking an experienced individual to be responsible for the overall management of our private securities offerings and growing our investor base. The successful candidate will have a proven track record sourcing capital and closing private equity/debt offerings. Investment banking, private equity or hedge fund experience preferred.